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Investment banks cut back on emergency Fed loans

Ben Bernanke said financial activity is 'far from normal.' Ben Bernanke said financial activity is "far from normal." (JOHN GRESS/REUTERS)
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Associated Press / May 23, 2008

WASHINGTON - Wall Street investment companies are reducing their borrowing from the Federal Reserve's emergency lending program.

The Federal Reserve said in a report yesterday that those companies averaged $14.2 billion in daily borrowing over the past week. That compares with $16.6 billion in the previous week.

The program, which began March 17, is one of several steps the Fed has taken to help industry and the economy overcome the fallout from housing, credit, and financial troubles.

After a run on Bear Stearns pushed the nation's fifth-largest investment bank to the brink of bankruptcy in March, fears grew that other Wall Street firms might be in jeopardy.

Scrambling to avert a market meltdown, Fed chairman Ben Bernanke and his colleagues invoked the broadest use of the central bank's lending power since the 1930s when they agreed to let investment houses obtain emergency financing from the Fed. That was a privilege previously granted only to commercial banks.

The program, similar to one the Fed long has had for commercial banks, will continue for at least six months. It gives investment companies a place to go for overnight loans. Commercial banks and investment companies now pay 2.25 percent in interest for the loans.

Banks also reduced their borrowing, according to the report. They averaged $13.5 billion in daily borrowing for the week ending May 21, compared with $14.4 billion for the previous week. The identities of commercial banks and investment houses are not released.

Bernanke recently said turmoil in financial markets has eased somewhat, but the situation is still "far from normal."

As part of efforts to relieve credit strains, the Fed auctioned $46.1 billion in Treasury securities to investment companies yesterday.

The ninth and latest auction drew bids for less than the $75 billion available. That could be a sign of some improvements in credit conditions.

In exchange for the 28-day loans of Treasury securities, bidding companies can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.

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